ECON+ has, once again, the pleasure of bringing you an exclusive interview with Otaviano Canuto, Executive Director at the World Bank. This time, the article “The Mist of Central Bank…
The Mist of Central Bank Balance Sheets Otaviano Canuto | Mon, 24 April 2017 This podcast is performed by Mr. Otaviano Canuto. Central banks of large advanced and many…
Emerging Markets (EMs) are more likely to suffer shocks, such as commodity-price and terms-of-trade shocks, as well as surges and sudden stops in capital flows.. Furthermore, structural and institutional features typical of most EMs tend to amplify and propagate shocks. Even when asset price-led cycles are not generated within EMs, they tend to be affected the most due to capital flows.
The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs) face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy measures. Drawing on Canuto, Otaviano, and Swati R. Ghosh, eds. 2013. Dealing with the Challenges of Macro Financial Linkages in Emerging Markets. Washington, DC: World Bank), this note discusses the challenges of dealing with macro financial linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs.
The 2008 financial crisis highlighted the challenges associated with global financial integration, emphasized the importance of macro financial linkages and challenged pre-crisis financial stability regimes.
The mid-year season was marked by a strong pressure of capital outflows and exchange rate devaluations in several systemically relevant emerging market economies. Announcements in May that the Federal Reserve had started to focus on phasing out its asset-purchase program – otherwise known as quantitative easing or (QE) sparked a surge in bond yields that in turn triggered an asset sell-off in those emerging markets. Although subsiding in September, particularly after the Fed announced that “tapering” would not begin yet, concerns remain about what will happen when the actual unwinding of QE eventually unfolds. We argue here that events since May could ideally provide a “fire drill” that might induce emerging markets to address various policy shortcomings that have been exacerbated by the flood of global liquidity in the last few years.
While unconventional monetary policies have been appropriately anti-cyclical in ACs implementing them, they have had inappropriately pro-cyclical consequences on EMs -- boosting credit and demand when most economies among the latter were already heated up, and threatening to accentuate a slowdown where it started to happen.
The adjustment to the “normalization” of the US monetary policy may end up being not as disruptive as many analysts are expecting. It will depend on the pace of recovery in the US economy and/or the smoothness of China’s adjustment-cum-slowdown . However, to fully overcome the current turmoil, EMs must not lose sight of their country-specific reform agendas.
The discussions at last month’s G-20 meeting of finance ministers were dominated by anxiety over so-called “currency wars.” But, to escape the crisis, global leaders must shift their focus to channeling the massive liquidity that advanced countries' controversial monetary policies have generated toward long-term investment financing.
This week marks the fifth anniversary of the global financial crisis. Five years ago, the world of finance was shocked when BNP Paribas announced a freeze of three of…
While the rich world puts its post-crisis house in order, developing countries as a whole are becoming the new engine of global growth. But switching locomotives is never free of risk.
An energetic debate on the danger of a global currency war has flared up in recent months, stoked by a renewed move to “quantitative easing” in the United States,…